The process of cancelling or releasing student loans is called student loan forgiveness. This happens usually after you have met certain criteria.
Student loan forgiveness is not like debt settlement or bankruptcy where you can get rid of some or all of your debts. It can also help you pay back what you owe. This is everything you need to know.
What is the Work of Student Loan Forgiveness Programs?
While there are many types of student loan forgiveness programs that borrowers may be eligible for, they are only available to federal student loans. Each program offers forgiveness up to a certain amount.
- Public Service Loan Forgiveness
The Public Service Loan Forgiveness Program (PSLF), is designed to assist college graduates who work in a government agency, or a nonprofit organization that qualifies. To qualify, you must:
- Take up an income-driven repayment plan to make 120 monthly qualifying payments.
- You can work full-time for any U.S. federal or state government, or eligible nonprofit.
Federal direct loans are available to you if you do not have them. You can consolidate student loans through the direct loan consolidation process.
After you have met all requirements for PSLF, your remaining loans will be forgiven. The canceled amount will not be considered taxable income. This is not a guarantee for all forgiveness programs.
- Income-Driven Repayment Programs
Federal student loan borrowers can get income-driven repayment plans. However, the types of loans you are eligible for and your financial situation will affect which plans you are eligible for.
No matter which plan you choose to go with, your monthly payment could be reduced by 10% to 20% of your discretionary earnings and your repayment term may be extended to 20 to 25 years. The Department of Education will forgive any balance after the repayment period ends.
This forgiveness option has one drawback: the canceled debt will become taxable income and you need to plan accordingly when you file your taxes.
- Forgiveness of Teacher Loans
You may be eligible for the Teacher Loan Forgiveness Program if you are interested in education. This program caps your forgiveness potential depending on the subject you teach.
- You must meet the following requirements to be eligible for forgiveness under this program:
For a minimum of five years, you must be employed full-time by an elementary school, secondary or educational service agency that supports low-income students.
You must have at least a bachelor’s and teacher’s license in your state. If you are denied certification or licensure on an emergency, provisional, or temporary basis, you will be disqualified.
- You can get federal or direct Stafford loans.
These and other requirements will allow you to qualify for $17,500 in forgiveness if you are a teacher of science or math in secondary schools or special education at all levels. Forgiveness can be granted to all other teachers up to $5,000 This benefit, like the PSLF program is not taxed.
What are the benefits of student loan forgiveness programs?
Many college graduates find student loans financially burdensome. Fortunately, forgiveness programs can help to reduce or eliminate some of these debts. Two of these programs offer the ability to reduce your monthly payments based upon your income. This can help with budget problems.
Even if your student loan forgiveness is limited to $5,000 through the Teacher Loan Forgiveness Program, this can save you thousands in principal and interest payments.
What are the Downsides of Student Loan Forgiveness Programs?
- Every student loan forgiveness program comes with its own set of drawbacks. It is important to be aware of these before you begin the process.
- PSLF may mean that you are giving up income you earned working in the private sector to work for government agencies or nonprofits. The Teacher Loan Forgiveness program could be a similar issue if teachers are paid less in low-income areas than the rest of the schools. You could end up spending more money chasing forgiveness than you should.
- The PSLF program requires 120 monthly qualifying payments. This means that it will take at least 10 years for you to become eligible. You will need to make payments for either 20 or 25 years under income-driven repayment plans.
- If you choose an income-driven repayment option, the forgiven balance you have will be taxable. This could lead to problems with the IRS if the debt is not paid on time.
Where can I find student loan forgiveness programs?
The U.S. Department of Education offers all three programs for student loan forgiveness. You can find out if your eligibility is determined by which program you are looking at.
You should also be aware that each program comes with fine print. If you don’t read them, you could lose your eligibility. To avoid unpleasant surprises, make sure to read the terms of the program before you cancel.
How to get help with student loans?
Unfortunately, not everyone can access student loan forgiveness programs. And even if they were, they may not be the right fit. If you are struggling to pay your student loan debt, there are other options.
Forbearance and deferment: Federal and private loans can be used for forbearance and deferment. However, terms for private loan borrowers may vary from lender to lender. To be approved, you will need to provide evidence of financial hardship. However, your lender/servicer will suspend your payments until you are able to make regular payments.
You can change your repayment plan. Even if your income is not as high as you would like, your monthly payments will be recalculated every year based on your income. You have other options for federal borrowers to reduce your monthly payments.